Inflation and Property Insurance
Author: Alliant
Over the past year, inflation has become a growing concern. Inflation issues have largely resulted from a culmination of labor and supply trends brought on by the COVID-19 pandemic, and they are clearly reflected within the country’s rising Consumer Price Index (CPI). According to the latest data from the Bureau of Labor Statistics (BLS), the CPI for all urban consumers surged by 7.9% in the last twelve months—representing the largest increase over this amount of time since 1982.
Inflation issues could create a number of challenges in the commercial insurance market, affecting both insurers and their policyholders. With this in mind, it’s crucial for insureds to have a clear understanding of inflation and take steps to ensure adequate coverage during these difficult market conditions.
- Labor shortages—The impact of the pandemic has caused many workers to reevaluate their employment priorities and made unemployed individuals apprehensive of returning to the workforce—the proportion of people who have been out of work for six months or longer is at its highest point in 60 years. These labor shortages have led to substantial struggles, particularly in the construction industry, often causing production or project delays. Employers are being forced to increase their salary offerings to retain or attract workers. Such trends have ultimately ramped up overall labor costs and created subsequent inflation concerns.
- Supply chain disruptions— A major factor contributing to today’s market issues is how supply chain and warehousing models are currently set up. In recent years, due to global connectivity, the world has heavily relied on “just-in-time” (JIT) supply models. These models focus on receiving orders precisely when needed to reduce storage costs for inventory and help increase product turnover. However, when the JIT model’s precision is disrupted anywhere, the entire system slows down, putting it at risk. During the pandemic, this occurred on a massive scale and particularly impacted construction materials. Even as businesses have resumed their normal operations and increased production levels, consumer demand for certain items and materials has continued to outpace inventory. In response to these supply chain concerns, the cost of many items and materials across industry lines have soared to help offset demand. In turn, inflation is soaring and prices are rising at the fastest pace since 1982, according to the New York Times.
Inflation’s Impact on Insurance
Materials and labor costs grew 26.7% and 5.5%, respectively, in the first four months of 2022 compared to the same period of 2021, according to government data. Supply chain disruptions and labor shortages also caused construction delays.
These rising inflation rates are making it more difficult to make sure that property values are adequate. Rising costs for construction materials and labor means elevated loss severity for insurers because repair and replacement work are more expensive.
Right now, property insurers are not raising coverage limits and rates to keep pace with inflating construction costs, according to a Moody’s Investors Service report. Moody’s provided several reasons that explain why insurers may not be keeping pace with construction costs. Their coverage software may not adequately account for the cost increases. Insurers may increase coverage by an average annual inflation rate to smooth out construction cost volatility. They may worry sudden, large increases will prompt insureds to shop around. Also, since insurers must wait until policy renewal to adjust rates, there can be a delay between an uptick in costs and premium changes. However, commercial property insurers expect to raise pricing by about 6.5% this year, according to a Moody’s survey.
Looking ahead, both economists and the federal government anticipate supply chain conditions to improve in the latter half of 2022, lowering the risk of disruptions and helping ease inflation concerns. Yet, a combination of continued labor struggles and other lasting impacts from COVID-19 are expected to keep the inflation rate above pre-pandemic levels through at least 2023. As such, inflation issues may persist for the foreseeable future and property insurance pricing may be elevated to address this factor.
Combating Inflation’s Impact
With little hope for inflation to reduce anytime soon and the potential for a large increase in property premiums, companies can take some steps to make sure their property schedule is accurate:
1. Review Statement of Values (SOV)-Looking at the dollar per square foot for all the different buildings and construction type can help one to see what the current values are and see if they seem to be consistent or if there are discrepancies. If a property has not been assessed in a while, now would be a good time to have it evaluated.
2. Talk to the Teams-Speak with the facilities and construction teams to get a sense of what they are seeing in terms of cost to build or maintain a building right now.
3. Talk to Your Broker—Ask what kind of rates they are seeing for similar types of occupancies and construction types.
We understand that adjusting property values can invite higher premiums. Ultimately, taking the steps above will help clients understand and tell the underwriting community a strong story about the portfolio. Having a good command over the data can ultimately help get the best rate possible in this uncertain market.